Continuing the recent trend of expanding the UK’s already extensive body of tax legislation, 2011 looks likely to be a busy year for the law makers. This article summarises the key tax changes that are set to take place over the next year.
From 4 January, VAT increased from 17.5% to 20%. The new rate should be applied to supplies of standard-rated goods and services made on or after 4 January 2011.
Transitional rules deal with supplies that may straddle the date of the change of rate, with the result that VAT invoices issued in the early part of 2011 may well reflect both the 17.5% and the 20% rates.
REDUCTION IN CORPORATION TAX
The main rate of corporation tax will reduce to 27% from 28% (with the small companies’ rate reducing from 21% to 20%) as of 1 April 2011. A further reduction to 26% should take effect from April 2012. It is expected that the main rate will eventually fall to 24%.
From April, the income tax personal allowance will increase from £6,475 to £7,475, but will be accompanied by a reduction in the basic rate upper limit from £37,400 to £35,000.
INCREASE IN NATIONAL INSURANCE
National insurance contributions rates will increase by 1% for employers, employees and self-employed individuals from April 2011. This means that the rates will be 12% for employees, 13.8% for employers and 9% for self-employed individuals.
STAMP DUTY LAND TAX (SDLT)
SDLT will be increased to 5% (from 4%) for residential properties exceeding £1m, with effect from 6 April 2011.
2011 will be the first year for the ‘bank levy’.
This charge, applicable for accounting periods ending on or after 1 January 2011, is based on the ‘total chargeable equity and liabilities’ as reported in the balance sheets of affected banks and building societies at the end of a chargeable period.
The levy is expected to raise £2.5bn in additional tax from banks and building societies operating in the UK.
The Chancellor’s Budget will be delivered on 23 March 2011, with the Finance Bill 2011 due to be published on 31 March 2011. In addition to various anti-avoidance measures, the draft Finance Bill 2011 is likely to include the following measures.
Reduction in capital allowances
The rate of capital allowances for plant and machinery expenditure is expected to be reduced to 18% (from 20%), and the rate for assets in the special rate pool (which includes long-life assets) is likely to be reduced to 8% (from 10%). The Annual Investment Allowance (which allows for 100% relief on expenditure on certain qualifying plant and machinery) will also be reduced to £25,000 (from £100,000). However, all of these changes will not take effect until April 2012.
Controlled Foreign Company (CFC) rules
CFC rules are being amended. First, by interim measures and then, in autumn 2011, by final legislation. It is hoped that the changes will make the CFC regime more favourable for UK-based multinational groups. The interim measures are likely to include:
- an exemption for certain intra-group trading transactions, where there is little connection with the UK and it is unlikely that UK profits have been artificially diverted;
- an exemption for CFCs with a main business of intellectual property (IP) exploitation, where the IP and the CFC have minimal connection with the UK;
- an exemption that runs for three years for foreign subsidiaries that, as a consequence of a reorganisation or change to UK ownership, come within the scope of the UK’s CFC regime for the first time;
- amending the conditions of the current de minimis exemption, to increase the limit for large groups from £50,000 to £200,000 profits per annum; and
- extending the transitional rules for superior and non-local holding companies until July 2012.
It is hoped that 2011 will see the end to the long-running uncertainty over the UK’s CFC regime.
Corporation tax on chargeable gains
Positive corporate chargeable gains measures are likely to be introduced. The changes aim to:
- remove some existing restrictions on the use of capital losses within a group of companies after the acquisition of a business;
- replace the value-shifting rules with a purpose-based rule; and
- amend the degrouping charge rules.
Taxation of foreign branches
The foreign branches opt-in tax exemption may be included in the draft Finance Bill 2011. The aim is to ensure that foreign branches of a UK company are potentially exempt from UK tax (and, so, to treat them in the same manner as overseas subsidiaries). The exemption must be elected for, and will apply to all foreign branches of a company.
Pensions tax relief
Restrictions to pensions tax relief are expected to be taken forward, with the annual allowance for tax relief on pensions to be reduced from £255,000 to £50,000 from April 2011.
Legislation reducing the lifetime allowance to £1.5m (from £1.8m) is expected to be introduced in April 2011 and will take effect from April 2012.
There will be a change to the qualifying conditions for employer-supported childcare (ESC) schemes in respect of childcare vouchers and directly contracted childcare. Currently, it is a condition for ESC schemes to be open generally to employees (ie available to all). This presents a problem for employers with employees earning the national minimum wage (NMW) or near that amount, as salary sacrifice schemes can not be used for these employees. The new measure will allow employers to make their ESC schemes unavailable to employees earning at or near the NMW.
There is also going to be a restriction on the level of income tax relief available to higher rate and additional rate taxpayers joining childcare schemes, so the relief available matches the amount available to basic rate taxpayers.
VAT treatment of marketing samples
The UK VAT rules are likely to be changed to remove VAT on free samples provided for marketing purposes by businesses to individuals.
There will be an array of consultations and working groups on tax reform during 2011. A report on the prospects for a UK ‘general anti-avoidance rule’ is due in October and the first full report of the Office of Tax Simplification is due by March. There are to be various consultations on reforms to make the UK more fiscally attractive in the face of competition from abroad, with proposals for a ‘patent box’ (allowing for a 10% tax rate for profits from patents) likely to be taken forward with an intention of introduction in 2012.
Plans to ‘simplify’ the UK tax system are certain to be talked and written about a lot in 2011, with a likely result of even more new tax legislation. The year should see some sort of resolution to the long-running uncertainty over the CFC rules and further positive changes could be made (or, at least, progressed) to improve the UK tax system for international businesses. Good tax news for higher and additional rate taxpayers is expected to be very thin on the ground.